Don’t get rat­tled by a bumpyWall Street

The Covington News - - Business - Joe Stier

In the in­vest­ment world, th­ese are no or­di­nary times. Con­sider the fol­low­ing:

• On Sept. 15, The Dow Jones In­dus­trial Av­er­age fell more than 500 points— the big­gest point drop since the Septem­ber 2001 ter­ror­ist at­tacks. Fol­low­ing this de­cline, the mar­ket was down about 23 per­cent from its all-time high last Oc­to­ber.

• Fac­ing big losses, two big names onWall Street — Mer­rill Lynch and Lehman Broth­ers— took dras­tic steps to res­cue their re­spec­tive busi­nesses, with Mer­rill Lynch sell­ing it­self to Bank of Amer­ica and Lehman Broth­ers fil­ing for bank­ruptcy pro­tec­tion.

• The U.S. gov­ern­ment has bailed out in­vest­ment bank Bear Stearns, mort­gage fi­nance giants, Fan­nie Mae and Fred­die Mac, and Amer­i­can In­ter­na­tional Group (AIG).

What’s be­hind this slew of bad news? Sev­eral fac­tors are in­volved, but a key cul­prit is the sub­prime mort­gage cri­sis, which re­sulted in enor­mous losses suf­fered by fi­nan­cial in­sti­tu­tions.

Of course, we’ve seen large mar­ket de­clines be­fore, but what’s hap­pened to th­ese ma­jor play­ers in the in­vest­ment world is some­thing new for most of us. And yet, you shouldn’t con­fuse the prob­lems of cer­tain fi­nan­cial ser­vices providers with the vi­a­bil­ity of our fi­nan­cial mar­kets as a whole. We still have the most pow­er­ful and re­silient econ­omy in recorded his­tory, and in­vest­ment op­por­tu­ni­ties still abound.

None­the­less, as an in­di­vid­ual in­vestor, you’ll find it hard to ig­nore the re­cent mar­ket tur­moil. How should you re­spond to this level of volatil­ity?

Ba­si­cally, you have th­ese weapons at your dis­posal:

• Pa­tience — It’s usu­ally not a good idea to let short-term mar­ket move­ments dic­tate your long-term in­vest­ment strat­egy. If the cur­rent mar­ket de­cline led you to take a “time out” from in­vest­ing, you might feel bet­ter for a few weeks or months, but you wouldn’t be help­ing your­self achieve your long term fi­nan­cial ob­jec­tives. In the past, the mar­ket has fallen sharply af­ter a va­ri­ety of events — wars, as­sas­si­na­tions, ter­ror­ist at­tacks, nat­u­ral dis­as­ters, cor­po­rate scan­dals and so on— only to re­gain its foot­ing and move on to new highs.

• Di­ver­si­fi­ca­tion— If a mar­ket down­turn pri­mar­ily af­fects just one type of as­set, such as do­mes­tic stocks, and your port­fo­lio is dom­i­nated by that as­set, you could take a big hit. But if you broaden your hold­ings to in­clude in­ter­na­tional stocks, bonds, Trea­sury se­cu­ri­ties, cer­tifi­cates of de­posit (CDs) and other in­vest­ments, you can po­ten­tially re­duce the ef­fects of mar­ket volatil­ity.

• Qual­ity— Dur­ing mar­ket down­turns, even qual­ity stocks can lose value. But th­ese same stocks have the po­ten­tial to re­cover when the mar­ket turns around. Look for good, solid com­pa­nies whose prod­ucts are com­pet­i­tive and whose man­age­ment has enun­ci­ated a strat­egy for fu­ture growth.

The last few months have been dif­fi­cult ones for in­vestors, and we may still have some rough roads ahead. But by show­ing pa­tience, di­ver­si­fy­ing your hold­ings and buy­ing qual­ity in­vest­ments, you can con­tinue to make progress to­ward your long-term goals— in mar­kets that are good, bad or in­dif­fer­ent.

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